Reframing the Student Loan Costing Debate: The Benefits of Competition

Galloway, Fred; Wilson, Hoke

Online Submission

As debate in Washington heats up regarding congressional reauthorization of the Higher Education Act, a central question involves what to do about the continued coexistence of the two student loan programs--the Federal Family Education Loan Program (FFELP) and the Direct Loan Program (DLP). With hundreds of millions of dollars at stake for banks, loan servicers, guaranty agencies, and secondary markets, the debate so far has been long on partisan politics and short on empirical evidence, with both sides claiming that their loan program is the cheapest and most efficient (Student Loan Watch, 2005). However, in this paper we argue that comparing the cost per loan between programs is at best counterproductive, since any benefits that have accrued to taxpayers have occurred as a direct result of the competition between the programs. In other words, the economics of each loan program cannot be viewed in isolation since many, if not all, of the cost-saving innovations advanced by each program have occurred as a way of improving upon the services offered by their competitor. (Contains 2 tables and 4 figures.)